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ORI GIN AL PA PER
The refusal of the subsistence level for nonresidenttaxpayers: an analytical survey of the relevant legalframework
Jens Glowienka
� Springer-Verlag Berlin Heidelberg 2014
Abstract According to the case law of the European Court of Justice, personal
circumstances of nonresident taxpayers from other member states of the European
Union do not need to be taken into account by the state of source when determining
the taxable income of such nonresidents. Thus, the refusal of a subsistence level to
nonresidents is in general in line with the European law. However, according to the
relevant rulings of the court no additional tax burdens may caused by using higher
tax rates for nonresidents. In this paper it is therefore examined in what ways the
subsistence level may be refused to nonresidents. In order to do so, it is crucial to
examine how the subsistence level is granted to resident taxpayers. Especially if the
subsistence level is entirely integrated into the tax scale, this might lead to incorrect
results. In order to avoid such incorrect results, each limit of the tax scale has to be
analyzed more precisely. As this paper shows, there is even a contradiction in the
rulings of the European Court of Justice. Additionally, this paper shows that an
incorrect refusal of the subsistence level leads to a modification of the applicable tax
rates for nonresidents. As a result, nonresidents are faced with an additional tax
burden on top of the additional tax burden caused by the refusal of the subsistence
level itself. These implications are shown for the case of Germany. They might be in
breach with former rulings of the court.
Keywords Income tax � Nonresident � Legal framework � Germany �Subsistence level
JEL Classification C59 � H24 � K34
J. Glowienka (&)
Lehrstuhl fur Allgemeine Betriebswirtschaftslehre, insbesondere Betriebswirtschaftliche Steuerlehre
und Wirtschaftsprufung, Europa-Universitat Viadrina, Frankfurt (Oder), Große Scharrnstraße 59,
15230 Frankfurt (Oder), Germany
e-mail: [email protected]
URL: http://www.wiwi.europa-uni.de/de/lehrstuhl/fact/steuern/index.html
123
J Bus Econ
DOI 10.1007/s11573-013-0704-2
1 Introduction
According to the rulings of the European Court of Justice (ECJ), it is in general not
harmful if the subsistence level is refused to nonresidents in the state of source
within the European Union (EU). It is solely the responsibility of the resident state
to grant this relief in order to consider personal circumstances. The way of refusing
the subsistence level is limited by the legal framework of the EU. Especially with
regard to the taxation of nonresidents in the state of source, the ECJ has ruled three
important judgments that influenced the taxation in the several member states of the
EU. Therefore, this paper examines in a first step whether there are any
contradictions in the method of refusing the subsistence level as proposed by the
ECJ.
Furthermore, the granting of a subsistence level is a technical topic of tax
collection. Especially if it is integrated into the applicable tax scale, it is not always
obvious whether it is granted as a tax credit or a basic allowance. This may lead to
an incorrect refusal of the subsistence level to nonresidents and accordingly to an
additional tax burden for them, on top of the additional tax burden caused by the
refusal of the subsistence level itself. While this refusal may in general be in line
with earlier decisions of the ECJ, the technical implementation of refusing the
subsistence level in some jurisdictions might still violate the guidelines of other ECJ
decisions. After the analysis of the refusal of the subsistence level in an abstract
manner, the results of this analysis are applied to the concrete case of Germany.
After a short literature overview about the topic as a whole, the analysis is
divided into two parts: The first part analyzes the consequences of the rulings set by
the ECJ. Therefore, a short introduction is given into the relevant rulings and the
possibilities of granting the subsistence level. Based on these rulings, the different
methods of granting the subsistence level shall be identified if the subsistence level
is integrated into the applicable tax scale. A simple numerical example demonstrates
the possible impact the tax revenues of the state. The second part analyzes the
current situation of nonresidents in Germany as an example and shows the impact
on an individual nonresident taxpayer.
2 Literature overview
How tax benefits can be granted is one topic of many textbooks in public finance
(e.g. Pollak 1980; Homburg 2010). In Germany discussions about how a subsistence
level should be implemented often occur at times a tax reform is initiated. An
example for a former discussion is given by Peffekoven (1972) with regard to the
tax reform in the 1970s. Twenty years later, the German Federal Constitutional
Court (BVerfG 1992) ruled that the former subsistence level in the German tax scale
was not in line with the German constitution because it was too low. As a reaction to
this decision, a new discussion in literature started in Germany about how the
subsistence level should in general be granted to the taxpayer. Siegel and Schneider
(1994, p. 597–599) introduce a graphical view on this topic. Homburg (1995) shows
formally that the subsistence level as a deduction from the taxable income may be
J. Glowienka
123
integrated into the applicable tax scale. Seidl (1997) points out that a deduction from
the taxable income is not equal to granting the subsistence level as a tax credit. An
extensive historical background with regard to this topic is given by Treisch (1999,
2005) who points out that granting the subsistence level mainly depends on the legal
system in each country.
A brief summary of the discussion as a whole is given by Wosnitza and Treisch
(1999a) which includes an analysis of the discussed alternatives. Their article
revived the discussion of how the subsistence level should be granted. Please refer
to Bareis (1999a), Siegel (1999), Schneider (1999), Jachmann (1999) and Wosnitza
and Treisch (1999b) for further explanations.
The literature discussing the taxation of nonresidents on a European level is
usually very specific to each individual ruling of the ECJ. The decision C-234/01—
Gerritse (ECJ 2003) was criticized by Grams and Schon (2008, p. 660) who
developed another principle to tax the income of nonresidents using an average tax
rate. Their concept has been ignored by literature in the past. Some more general
questions were asked by Wattel (2000), focusing on the progressive taxation of
nonresidents in the EU. An other interesting work is Mattson (2003). He asked, if
the ECJ really understands the policy behind tax benefits. In his opinion tax benefits
based on personal circumstances—such as the granting of a subsistence level—are
relevant parts of the tax rate. Finally, the ECJ is not allowed to rule against the tax
rates of member states (Mattson 2003, p. 194).
An introduction to the German income tax is given by Hey and Seer (2013) with
considerable references to current legal publications. Detailed information regarding
the procedure on tax collection is delivered by Liebing (2004) and the legal
commentaries. Loschelder (2013) and Wied (2013) discuss the taxation of
nonresidents in Germany. They state that the current procedure of taxing
nonresidents is in line with the European legal framework. Additionally they are
of the opinion that adding the subsistence level to the domestic income of
nonresidents is only a technical aspect to tax nonresidents and conclude that this
method is suitable to avoid an additional tax burden.
As can be seen from the above, the literature in Germany mainly discusses the
issue of how the subsistence level should be granted in general for resident
taxpayers. However, there is no literature so far that analyzes the effects of refusing
the subsistence level to nonresidents from an economic perspective and whether the
results differ depending on the method used for granting the subsistence level. The
reasons for this missing piece in literature may be speculative. On the one side, this
topic needs fundamental legal knowledge, especially in national tax law and
European law. On the other side claimed Bareis (1991, 1999a, b, 2010) that for
analyzing such a topic the use of precise mathematical models is needed. A
combination that may only can be found in German Business Research on taxation.
In a first step, this paper shall therefore identify the impacts of denying the
subsistence level to nonresidents and hence show in a second step whether there is a
contradiction with the EU law. With regard to the taxation of nonresidents in
Germany, the thesis of Loschelder and Wied that by simply adding the subsistence
level to the taxable income of a nonresident leads to a reasonable result without
The refusal of the subsistence level for nonresident taxpayers
123
violating EU law, has not been proven so far. Therefore this article shall show
whether this thesis is correct.
3 General analysis
3.1 European framework
The implementation and arrangement of the national tax law lies solely in the hands
of each member state (Kokott and Ost 2011, p. 497; Greggi 2009, p. 119; Englisch
2003, p. 91). However, the aforementioned arrangement must not limit the
fundamental freedoms of the EU (Kokott and Ost 2011, p. 496). This also applies to
nonresident taxpayers. As there is no primary legal framework on the European
level, it is the duty of the ECJ to decide whether the fundamental freedoms of a
nonresident are violated by a national tax law or not.
The ECJ has introduced the principles with regard to the taxation of nonresidents
in three major decisions: In the first decision of the ECJ in 1995 (C-279/93—
Schumacker, ECJ 1995) it was ruled that resident and nonresident taxpayers may in
general be treated differently for tax purposes as they are not in comparable
situations. Subject to certain exceptions, personal circumstances of nonresidents
need not be considered in the state of source as they are in general taken into
account in the state of residence. This concept was named the so-called Schumaker-
Doctrine in literature. The general rule may only be disregarded if the nonresident
has a very low income in the country of residence.
Another question of whether nonresidents may be subject to a higher tax rate in
comparable situations was addressed by the ECJ in 1996 (C-107/94—Asscher, ECJ
1996). As a result, the ECJ rejected the application of higher tax rates for
nonresidents in the case of the Dutch tax law.
In the third decision in 2003 (C-234/01—Gerritse, ECJ 2003), the ECJ pointed
out three central statements with respect to the treatment of nonresidents (Seer et al.
2005, p. 290). Firstly, the ECJ ruled that the taxable income of resident and
nonresident taxpayers must be determined on the same basis including expenditures
connected to generating the taxable income.1 However the ECJ confirmed that—
based on the ruling in 1995 (ECJ 1995)—it is not harmful if personal circumstances
are refused to nonresidents. This was in 2004 picked up in the ruling (C-169/03—
Wallentin, ECJ 2004) in which it was decided that the subsistence level may be
disregarded for nonresidents even if is integrated in the tax scale.
Secondarily, the ECJ ruled in Gerritse (ECJ 2003) that a fixed tax rate applicable
to nonresidents is not in line with the European law if this tax rate leads to a higher
tax burden of the nonresident compared to a progressive tax rate—disregarding the
subsistence level—applicable to a resident taxpayer. Thirdly and most importantly,
it was decided in the second head note that the subsistence level may be added to the
taxable income of a nonresident.
1 In this ruling the German legislature failed to supply a justification for the unequal treatment. For
further details refer to ECJ (2003, recital 29, p. I-5955).
J. Glowienka
123
3.2 Possibilities of granting a subsistence level
3.2.1 The general structure of tax scales
A tax (Tax) is levied by applying a tax scale T(�) to an assessment basis TI, the
taxable income.2 Thus, the mathematical function of the tax has in general the
following structure:
Tax ¼ T TIð Þ: ð1ÞIt shall furthermore be assumed that the tax scale function is divided into three
different zones (n = {1, 2, 3}) which are described by the Term Tn. Within these
zones, individual tax scales are applied. The limits of these zones are described by
TLn. Thus, the general function of the tax burden (1) can be expressed as follows
Tax ¼T1 TIð Þ TI� TL1
T2 TIð Þ TL1\TI� TL2
T3 TIð Þ TI [ TL2
8<
:ð2Þ
in which T1(TI) is the so-called ‘‘Zero-Zone’’. This means that no tax is being
charged. Consequently, the value for the function is zero. For now, the Zero-Zone
shall avoid a negative income tax. Hence, the zone is only applicable for a taxable
income below or equal to zero (TL1 = 0).
T2 and T3 are assumed to be linear zones of the tax scale. Thus, the taxable
income is taxed at a constant tax rate tn. t2 is the tax rate of the second zone (n = 2),
accordingly t3 is the tax rate of the third zone (n = 3). Let us now assume that t2 is
lower than t3 to simulate a progressive structure of the whole tax scale (Homburg
2010, p. 65; Siegel and Bareis 2004, p. 114; Pollak 1980, p. 243). By including the
adjustment factor in the form of c3 = TL2 � (t2 – t3) \ 0 in order to avoid
discontinuities in the tax scale, (2) transfers to the following tax scale:
Tax ¼0
t2 � TI
t3 � TI þ TL2 � t2 � t3ð Þ
TI� 0
0\TI� TL2�TI [ TL2
8<
:ð3Þ
3.2.2 The subsistence level as a deduction from the taxable income
It shall now be assumed that the taxable income TI consists of the income
I determined by national tax law. Additionally, a subsistence level (g) shall be
included in calculating the tax burden. The first alternative to grant this subsistence
level is a deduction from the taxable income. This means that the legislator accepts
that these private expenses are deductible like income related expenses. This also
implies that the applicable tax rules must include this form of deduction in the
section defining the taxable income.
If this method applies, the impact on the function of the tax burden can easily be
shown by computing TI = I - g. This term inserted into (3) leads to:
2 A similar method was used by (Bareis 1991, p. 407) in the discussion of the elder tax scale.
The refusal of the subsistence level for nonresident taxpayers
123
Tax ¼0 I � g� 0
t2 � I � gð Þ 0\I � g� TL2
t3 � I � gð Þ þ TL2 � t2 � t3ð Þ I � g[ TL2
8<
:ð4Þ
In the second alternative, the subsistence level is inserted as a basic allowance into
the tax scale. Thus, the whole tax scale only depends on the income I. A definition in
the article determining the taxable income is accordingly avoided. In this alternative
an additional adjustment factor c2 is needed and has to be inserted into the second
zone of tax scale. Additionally, the factor in the third zone (c3) has to be modified.
With c2 = – t2 �g and c3 = TG2 � (t2 – t3) – t3 �g formula (4) transforms into:3
Tax ¼0 I� gt2 � I � t2 � g g\I� TL2 þ gt3 � I þ TL2 � t2 � t3ð Þ � t3 � g I [ TL2 þ g
8<
:: ð5Þ
It can be concluded that if the legislator chooses this method, the provision
defining the tax scale must clarify that the applicability of the zones in the tax scale
depends on g. This fact is implicitly shown by Homburg (1995) and Seidl (1997),
however it is not mentioned explicitly.
The whole concept of granting a subsistence level as a deduction from the taxable
income is illustrated in Fig. 1. The taxable income (I) is shown on the abscissa and
the resulting tax (Tax) is shown on the ordinate. The starting point is the original tax
scale without the consideration of a subsistence level (solid line). It consists of three
scale zones T1, T2 and T3. T1 appears in the interval from negative infinity to point
A, which is equal to the point of origin in the coordinate system. The second zone
T2 is described by the line segment from point A to point B. The point B marks the
transition to the third zone T3 starting at a taxable income of TL2. If no subsistence
level is granted, only c3 is the adjustment factor. It can be graphically described as
the vertical line segment from point A to point C.
The transformation of the original tax scale by including the subsistence level as
a deduction from the taxable income is marked with a dashed line. T10, T2
0 and T30
mark the different zones after the transformation. As can be seen in Fig. 1, the
original tax scale is horizontally shifted to the right. The amount of the shift is the
granted deduction from the taxable income g. Hence the points A and B shift to the
position A0 and B0. That means that the second zone of the tax scale starts at a
taxable income greater than g. Nevertheless, the range of the second zone is not
modified. In contrast to the original tax scale, the third zone does not start at TL2, but
at TL2 ? g. Additionally two new points are inserted. These are the points C10 and
C20. The vertical line segment from A to C1
0 shows the amount of the additional
adjustment factor c2, which is described in Fig. 1 by c20. The vertical line segment
3 We get the value of c2 in order to equalize T2 (g) and T1 (g). T2 is generally defined as T2
(TI) = t2 � TI ? c2. T1 is defined to be the Zero-Zone: T1 = 0. The following result is 0 = t2 � g ? c2.
Transposed to c2, we get c2 = -t2 � g. The value of c3 is the result of the equalization of T2 (TL2 ? g)
and T3 (TL2 ? g), transposed for c3. Therefore, c2 has to be inserted into T2. Thus, we get
t2 � (TL2 ? g) – t2 � g = t3 � (TL2 ? g) ? c3. Transposed to c3, we get after some simplifications
c3 = TL2 � (t2 - t3) – t3 � g.
J. Glowienka
123
from A to C20 describes the modified adjustment factor c3 in case of a granted
subsistence level. For a better visibility in Fig. 1, it is denoted with c30.
By calculating the difference between the original tax scale and the tax scale with
the subsistence level, it can be demonstrated how each individual taxpayer gains
from the subsistence level granted as a deduction. The difference is named
DTdeduction. It is calculated by subtracting (5) from (4) with TI = I:
DTdeduction ¼
0
� t2 � I� t2 � gI � TL2ð Þ � t2 � t3ð Þ � t2 � g� t3 � g
I� 0
0\I� g
g\I� TL2
TL2\I� TL2 þ g
TL2 þ g\I
8>>>>>><
>>>>>>:
ð6Þ
It can be concluded from (6) that if a taxpayer has an income below zero, there is
no gain from the introduction of a subsistence level. In case of an income between gand TL2 or greater than TL2 ? g, the benefit is constant. If the income of the
taxpayer is within the interval, which is subject to a shift of the tariff section, the
benefit depends on the generated income. Less precisely, the more income is
generated in progressive tax scales, the higher the granted benefit. This result can
also be found in the paper of Peffekoven (1972, p. 408).
All findings for this case can be summarized as follows: Firstly, granting the
subsistence level as a deduction from the taxable income leads to a horizontal shift
of the applicable tax scale. That means that each zone of the tax scale starts at a zone
limit increased by the amount of the subsistence level. Each zone has the same range
as in the original tax scale when no subsistence level was taken into account.
Secondly, if this method may be implemented into the tax scale the same result
occurs. For that case, it is crucial to determine the limits of each zone depending on
the subsistence level.
I TL2
c3
TL2 + ηc2'
c3'
ηA A'
B B'
C
C2'
T2
T3
T1
C1'
T1'
T2'
T3'
Tax scale without the subsistence level
Tax scale with the subsistence level
Direction of the horizontal movement
Tax
Fig. 1 Graphical description of granting the subsistence level as a deduction from the taxable income
The refusal of the subsistence level for nonresident taxpayers
123
3.2.3 The subsistence level as a tax credit
Another possibility of considering the subsistence level is to grant a tax credit. In
contrast to the deduction from the taxable income, this concept provides the same
absolute tax benefit with less modifications for each individual. Peffekoven (1972,
p. 408) points out that a constant tax credit is equal to a decreasing basic allowance
in progressive tax scales. The effects of the subsistence level is shown in Fig. 2
using the same notation as Fig. 1.
If a subsistence level is granted as a tax credit (dashed line in Fig. 2), the tax
scale shifts vertically towards the abscissa. The amount of the shift depends on the
granted tax credit. Nevertheless, the starting point of the second zone (point A) is
horizontally shifted to the right (point A0) if a negative income tax is excluded. This
means that the second zone (T20) begins at a higher taxable income. Contrary to
point A, point B shifts vertically to B0. This means that the starting point of the third
zone (T30) does not move horizontally. However, the application of the third zone
leads to a lower tax. This implies that the range of the second zone is reduced. By
implementing this method into the tax scale, the points C10 and C2
0 mark the amount
of the adjustment factors. The additional adjustment factor c2 is described by the
vertical line segment from A to C10 (marked as c2
0). The modified adjustment factor
c30 consists of the sum of the additional adjustment factor c2
0 and the vertical shifted
adjustment factor c3. The result of this modification of the tax scale is that each
individual who earns an income exceeding g benefits from a constant tax reduction.
In case of implementing this method into the tax scale, expression (7) shows the
impact to the whole tax scale in a formal way. Therefore the tax scale in the second
zone (T2) is not applied to the amount of g and accordingly only the amount of
income that exceeds g is taxed. The additionally inserted adjustment factor (c2) has
again only the task to avoid discontinuities in the tax scale. It shall be pointed out
that the limits of each zone have to be independent from g in the provision of the tax
rules defining the tax scale. This above-mentioned condition integrated into
expression (3) with TI = I leads to the modified tax scale. With c2 = –t2 � g and
c3 = TL2 � (t2 – t3) – t2 � g, one gets:
Tax ¼0 I� gt2 � I � t2 � g g\I� TL2
t3 � I þ TL2 � t2 � t3ð Þ � t2 � g I [ TL2
8<
:: ð7Þ
Additionally, the impact on each individual taxpayer is the difference between
the original tax scale and the tax scale considering the subsistence level. The
difference is described as DTtax credit. It is calculated by subtracting (7) from (3)
under the condition TI = I:
DTtax credit ¼0
� t2 � I� t2 � g
I� 0
0\I� g
g\I
8><
>:ð8Þ
As a result of (8), the benefit for each individual from the subsistence level in the
form of a tax credit depends on the generated income I only if the income is between
J. Glowienka
123
0 and g. Merely for this range the rule—the higher the generated income, the higher
the benefit for the individual taxpayer—applies. If the income exceeds the amount
of g, the benefit is constant at an amount of c2.
Summarizing the findings of this method, it can be stated that granting a tax
credit leads to a vertical shift of the applicable tax scale. Secondly, this method can
also be implemented into the tax scale. Therefore it is necessary to point out that the
relevant provision of the national tax law has to define the limits of each zone
independently from the granted subsistence level. Thirdly, each person with an
income exceeding the amount of the subsistence level is granted a constant tax
benefit.
3.3 Critical reflection of the European legal framework
Taking the decisions of the ECJ into account, it can be stated that the subsistence
level for nonresidents may in general be refused in the state of source (Schumacker-
Doctrine). As already mentioned, the ECJ (2003) stated in the second principle of its
decision in that the refusal of the subsistence level by adding the applicable amount
to the taxable income should in general be in line with the European legal
framework.
This headnote is intuitively comprehensible if the subsistence level is granted as
a deduction from the taxable income. Starting at expression (5) and substituting the
income I with I ? g, which describes the addition of the subsistence level to the
income, one gets the expression (3) with TI = I. This is the tax scale if no
subsistence level is taken into account. That means that if the subsistence level is
granted by deduction from the taxable income, the modification described by the
ECJ (2003) leads to the ‘‘correct’’ result as this modification does not lead to a tax
burden additional to the tax burden caused by the refusal of the subsistence level.
The results change if the subsistence level is granted as a tax credit (7). If the
amount of g is added to the domestic income of a nonresident, this leads to the
following expression (9). With TI = I ? g, one gets for (7):
Tax
I TL2
c3
c2'
c3'
ηA
B
B'
C
C2'
T2
T3
T1
C1'
T1'
T3'
T2'
A'
c3 Tax scale without the subsistence level
Tax scale with the subsistence level
Direction of the horizontal movement
Fig. 2 Graphical description of granting the subsistence level as a tax credit
The refusal of the subsistence level for nonresident taxpayers
123
Tax ¼0 I� 0
t2 � I I� TL2 � gt3 � I þ TL2 � t2 � t3ð Þ þ g � t3 � t2ð Þ I [ TL2 � g
8<
:ð9Þ
which is not equal to (3) with TI = I in the third zone of the tax scale. As a result, an
additional tax is levied on the domestic income of nonresidents if the principle of
the decision in the case Gerritse (ECJ 2003) is applied by way of a tax credit and
this income in the state of source exceeds TL2 - g. In other words, the refusal in
accordance with the principles of the Gerritse decision (ECJ 2003) results in dif-
ferent tax scales for residents and nonresidents. This is inconsistent with the earlier
court decision in case Asscher (ECJ 1996) in which the ECJ ruled against the
application of a further additional tax on the domestic income of nonresidents.
Assuming that the principles of both rulings shall not be violated, the subsistence
level must be refused in a different way than proposed in Gerritse (ECJ 2003).
Instead of adding g, this term must be set equal to zero (g = 0) in order to calculate
the tax burden for nonresidents for the correct refusal. Using formula (7), one
obtains with c2 = -t2 � g = 0 and c3 = TL2 � (t2 - t3) - t2 � g = TL2 � (t2 -
t3) \ 0 the following expression, which is identical to (3) with TI = I:
Tax ¼0
t2 � It3 � I þ TL2 � t2 � t3ð Þ
I� 0
0\I� TL2
I [ TL2
8<
:: ð10Þ
In order to calculate the additional tax burden for nonresidents caused by the
method described by formula (9) for the incorrect refusal, expression (10) has to be
subtracted from (9). For this purpose, expression (10) gets the notation Tg=0 and
expression (9) the notation TI?g. The additional tax burden shall be named
DTincorrect refusal. With DTincorrect refusal = TI?g - Tg=0 one gets:
DTincorrect refusal ¼0 I� TL2 � gI þ gð Þ � t3 � t2ð Þ þ TL2 � t2 � t3ð Þ TL2 � g\I� TL2
g � t3 � t2ð Þ I [ TL2
8<
:: ð11Þ
This additional tax burden is zero up to an income of TL2 - g. After that it
increases until the taxable income reaches TL2. If the taxable income exceeds this
limit, the additional burden remains constant.
The following Fig. 3 illustrates the problem graphically. The starting point now
is the tax scale with a tax credit (short dashed line). The tax scale is divided into the
three zones T10, T2
0 and T30. Point A0 characterizes the zone limit, which is g for the
end of the Zero-Zone (T10) and the beginning of the second zone of the tax scale
(T20). Point B0 marks the end of the second zone in TL2 and the beginning of the
third zone. C10 and C2
0 mark the amount of the adjustment factors essential to avoid
discontinuities in the applicable tax scale.
If the subsistence level is correctly refused (g = 0), the original tax scale without
an integration of a subsistence level similar to Eq. (3) is received. This is shown in
Fig. 3 with a solid line. It consists of the three zones of the tax scale T1, T2 and T3.
The point A denotes the end of the first zone T1 and the beginning of zone T2. B
denotes the end of the second zone T2 and the beginning of the third zone T3. The
J. Glowienka
123
vertical line segment from point A to point C describes the adjustment factor c3 of
the third zone T3. As a result, the tax scale with subsistence level is moved vertically
up (black arrow). The maximum of the additional tax burden for taxpayers who are
faced with the refusal of the subsistence level is denoted by the vertical line segment
a.
In case of an incorrect refusal, the tax scale moves horizontally to the left (dashed
arrow) and accordingly points A0 and B0 move to the left. A00 describes the end of the
first zone of the tax scale (T100). In this zone, the correct and the incorrect refusal
lead to the same result.
Point B00 describes the end of the second zone T200. Following the above-
mentioned example, it horizontally moves to the position TL2 - g. Again in this
zone, the correct and incorrect refusal lead to the same result until the income equals
TL2 - g. The maximum of the additional tax burden is the vertical line segment a.
If however the income of the taxpayer exceeds this amount, the zone T300 applies
and thus the taxpayer is faced with an additional tax. This additional tax increases
until the taxable income reaches TL2 (point B200). If the income exceeds TL2, the
additional tax remains constant. The bold formatted vertical line segment
(DTincorrect refusal) in Fig. 3 denotes this additional tax. The additional tax burden
as a whole describes the vertical line segment b in Fig. 3. It consists of the
additional tax burden caused by the refusal of the subsistence level (line segment a)
and the additional tax caused by the horizontal shift of the tax scale
(DTincorrect refusal).
The findings can be summarized as follows: Firstly, refusing the subsistence level
to a nonresident by adding this amount to the domestic income should be in line
with the European legal framework following the ECJ decision in case Gerritse
(ECJ 2003). Secondly, this leads to the correct refusal if the subsistence level is
granted to residents as a deduction from the taxable income. Thirdly, the refusal of
the subsistence level leads to an additional tax burden for nonresidents if it is
A'
Tax
I
c3
ηA, A''
B
B'
T3
T1 , T
1'' T
1'
T3'
T2'' T
2'
ΔTincorrect refusal
B''
T3''
C''
TL2
TL2–η
C
C2'
a
a
b
C1' c3'
T2
Tax scale without subsistence level
Tax scale with subsistence level
Tax scale with incorrect refusal
Direction of the horizontal movement in case of a incorrect refusal
Direction of the vertical movement in case of a correct refusal
Fig. 3 Graphical description of the incorrect and the correct refusal of a tax credit
The refusal of the subsistence level for nonresident taxpayers
123
granted as a tax credit. In the latter case, a conflict between the more recent decision
in the year 2003 (ECJ 2003) and the earlier decision in the year 1996 (ECJ 1996)
can be identified. This is a finding, which should be discussed more intensively by
legal research on taxation.
3.4 Numerical example
In the following numerical example the effects of the above-mentioned methods and
the implications from the rulings of the ECJ shall be demonstrated for an individual
taxpayer and a fictional state.
A nation with five taxpayers shall be assumed where each taxpayer earns a
different annual income I (EUR 5,000; EUR 15,000; EUR 25,000; EUR 35,000 and
EUR 50,000). Furthermore, a simple tax scale as demonstrated in (3) with TI = I,
t2 = 10 % and t3 = 50 % shall be assumed. The limit of the zone (TL2) is set at an
amount of EUR 30,000.
As a start, the government of the state plans to introduce a subsistence level g of
EUR 10,000 that is integrated into the tax scale and granted as a deduction from the
taxable income similar to expression (5). Following (5), the government has to
define the limits of each zone depending on the subsistence level. In the following
Table 1, the columns show the individuals, their annual income, their income tax if
no subsistence level is granted, their income tax if a subsistence level is granted and
in the last column the benefit for each individual from introducing the subsistence
level. Each row of the table describes the impact on each individual. The last row
shows the impact on all taxpayers as a sum. This may be interpreted as the fiscal
effect on the state as a whole.
As can be seen in Table 1, the introduction of a subsistence level as a deduction
from the taxable income leads to a reduced tax burden for each individual. Thus, the
government earns a reduced amount of taxes. The benefit for each individual
depends in general on the generated income. It is constant if before and after
considering a subsistence level the same zone applies. It varies if the applicable
zone changes.
Alternatively, the government plans to introduce a subsistence level by
implementing a tax credit into the tax scale. Therefore, expression (7) is used in
Table 1 A numerical example for the impact on introducing the subsistence level as a deduction from
the taxable income
Individual Annual
income in
EUR
Income tax according to
(3) in EUR (applied
zone, average tax rate)
Income tax according to
(5) in EUR (applied
zone, average tax rate)
Benefit from introducing
the subsistence level
according to (6) in EUR
1 5,000 500 (T2, 10 %) 0 (T1, 0 %) -500
2 15,000 1,500 (T2, 10 %) 500 (T2, 3 %) -1,000
3 25,000 2,500 (T2, 10 %) 1,500 (T2, 6 %) -1,000
4 35,000 5,500 (T3, 16 %) 2,500 (T2, 7 %) -3,000
5 50,000 13,000 (T3, 26 %) 8,000 (T3, 16 %) -5,000
Sum 130,000 23,000 (18 %) 12,500 (10 %) -10,500
J. Glowienka
123
order to modify the tariff function. Again, an amount of EUR 10,000 shall be
exempted from taxation. Table 2 shows the impact of granting a subsistence level as
a tax credit.
Similar to the method of deduction, every taxpayer with an income greater than
zero gains from the tax credit. Furthermore, the amount of the benefit differs. In the
above-mentioned example, taxpayers with an income exceeding the subsistence
level g gain a constant tax benefit of EUR 1,000 if the tax credit is granted. Only if
the income is greater than zero but less than g, the taxpayers’ benefit is less than for
any other income. The reason is quite simply identified: a person with a low income
has accordingly a lower tax burden levied on this income than a person with a
higher income.
In order to compare the possible impact on the state, the last rows of Tables 1 and
2 are relevant. Following these two examples, it is less expensive for the
government to grant a tax credit than applying the method of deduction when
introducing a subsistence level. As shown in Table 1, the introduction of a
subsistence level of EUR 10,000 costs the government EUR 10,500 of unearned
taxes compared to the situation where no subsistence level is granted. In case of the
subsistence level granted as tax credit, the state earns less taxes of EUR 4,500. From
a tax revenues’ perspective, it is more attractive to grant a tax credit. Additionally,
this result may be politically relevant as every taxable person is faced with the same
tax benefit.4
The following Table 3 analyzes the impact of the refusal of the subsistence level
according to the court decision in case Gerritse (ECJ 2003). For this, it is assumed
that the subsistence level is implemented into the tax scale as a tax credit (7).
Additionally, all five taxpayers are now assumed to be nonresidents.
If the subsistence level is refused the way it is granted, this would lead to the
results in the third column. In contrast to that, the fourth column shows the results of
the tax burden on non-residents if the subsistence level is refused as proposed in the
ruling ECJ (2003). The last column shows the additional tax burden caused by the
incorrect refusal. From the tax revenues perspective, it is more attractive to reject
Table 2 A numerical example for the impact on introducing a subsistence level as a tax credit
Individual Annual
income in
EUR
Income tax according to
(3) in EUR (applied
zone, average tax rate)
Income tax according to
(7) in EUR (applied
zone, average tax rate)
Benefit from introducing
the subsistence level
according to (8) in EUR
1 5,000 500 (T2, 10 %) 0 (T1, 0 %) -500
2 15,000 1,500 (T2, 10 %) 500 (T2, 3 %) -1,000
3 25,000 2,500 (T2, 10 %) 1,500 (T2, 6 %) -1,000
4 35,000 5,500 (T3, 16 %) 4,500 (T3, 7 %) -1,000
5 50,000 13,000 (T3, 26 %) 12,000 (T3, 16 %) -1,000
Sum 130,000 23,000 (18 %) 18,500 (14 %) -4,500
4 This might be interesting regarding to the discussion in German literature (summarized by Wosnitza
and Treisch 1999a, b). In focus was often the question, what is the most equitable way to grant this tax
benefit.
The refusal of the subsistence level for nonresident taxpayers
123
the subsistence level as proposed in the Gerritse decision (ECJ 2003) if it is
integrated as tax credit. Rejecting the subsistence level regarding this method, leads
to additional tax revenues of EUR 10,000.
4 The subsistence level in Germany
4.1 National legal framework
In the last sections, the problems with respect to granting the subsistence level were
discussed in an abstract manner. However, using the example of Germany, it can be
shown that these problems may have a much greater effect than suspected at first glance.
Pursuant to sec. 1 (1) of the German Income Tax Act (ITA), a person is
considered to be a resident taxpayer if his habitual abode or dwelling is in Germany.
Accordingly, a nonresident person is subject to a limited taxation if domestic
German income as codified in sec. 49 ITA is generated.
Following the ECJ rulings, income related expenses may be deducted from the
domestic income of a nonresident, however nonresidents are excluded from deducting
expenses deriving from their individual situation in accordance with sec. 50 (1) ITA.
In general, the taxable income of residents is inserted into the tax scale in
accordance with sec. 32a ITA in order to calculate the tax burden. As a result, the
tax exemption of the subsistence level is automatically granted. In contrast to
residents, a subsistence level is in general not granted to nonresidents.5 Due to the
changes in the German tax law in 2009,6 the taxable income of nonresidents is
increased by the amount of the subsistence level (sec 50 (1) sentence 2, 1st clause
ITA). Subsequently, this increased income has to be inserted into the tax scale
Table 3 A numerical example for the refusal of the subsistence level according to the rulings of the ECJ
2003—Gerritse if the subsistence level is granted as a tax credit
Individual Annual
income
in EUR
Income tax according
to (3) in EUR (applied
zone, average tax rate)
Income tax according
to (9) in EUR (applied
zone, average tax rate)
Additional annual tax burden
caused by the incorrect
refusal according to (10) in
EUR
1 5,000 500 (T2, 10 %) 500 (T2, 10 %) 0
2 15,000 1,500 (T2, 10 %) 1,500 (T2, 10 %) 0
3 25,000 2,500 (T2, 10 %) 4,500 (T3, 18 %) ?2,000
4 35,000 5,500 (T3, 16 %) 9,500 (T3, 27 %) ?4,000
5 50,000 13,000 (T3, 26 %) 17,000 (T3, 34 %) ?4,000
Sum 130,000 23,000 (18 %) 33,000 (25 %) ?10,000
5 For example employees are excluded from this general principle according to sec. 50 (1) ITA. Another
exception applies to nonresidents who earn most of their income in Germany and who can opt for a
fictitious unlimited tax liability in accordance with sec. 1 (3) ITA.6 In 2009 the taxation of income of nonresidents has been changed within the framework of the annual
tax act in Germany (JStG 2009). Substantial change was the abolishment of the minimum taxation. This
enactment was based on the decision of the ECJ (2003).
J. Glowienka
123
pursuant to sec. 32a ITA in order to calculate the tax burden. In legal based
literature, this procedure is interpreted as only a technical implementation
(Loschelder 2013, p. 2262). This is an assumption that is further analyzed in the
following sections.
4.2 The German tax scale and its parameters
The German income tax scale T(I) is divided into five zones. Within these zones,
discrete functions Tn(I) within the limits of each tax scale TLn are applied. The first
zone is the so-called ‘‘Zero Zone’’. This is followed by two progressive zones
having a rising curve of marginal tax rates. Therefore, the tax scales in the second
and third zone are described as quadratic functions (‘‘linear-progressive areas’’,
Homburg 2010, p. 79).
The parameters an and bn describe the path of the marginal tax rate function and
shall be considered as exogenously given by the legislator.7 The absolute term cn is
however endogenously determined by the defined tax scale in order to avoid
discontinuities in the curve characteristics (Homburg 2010, p. 79). In the political
discussion, a starting marginal tax rate is often mentioned (i. e. Bundesrat 2012). It
is necessary to point out that such starting tax rate is not defined in the relevant
article sec. 32a ITA. There are only functions depending on the taxable income
given. The last two zones of the German income tax scale are linear functions.
Summarizing the above statements, the tax scale in accordance with sec. 32a (1)
ITA can in general be described by:
TðIÞ ¼
0 I� TL1
I � ða2 � I þ b2Þ þ c2 TL1\I� TL2
I � ða3 � I þ b3Þ þ c3 TL2\I� TL3
t4 � I þ c4 TL3\I� TL4
t5 � I þ c5 I [ TL4
8>>>><
>>>>:
: ð12Þ
The defined zone limits of the tax scale pursuant to sec. 32a (1) ITA exclusively
depend on the taxable income (I). Therefore, the subsistence level is not taken into
account, which again means that at no point an emphasis is placed on the
relationship between the limits of the zones (TLn) and the granting of the subsistence
level. This indicates that the German legislator applies a tax credit to grant the
subsistence level (see chapter 3.2.3; Bareis 1999a, p. 93). The following Table 4
shows the amount and the origin of each zone limit of the tax scale in sec 32a ITA.
For the general analysis, the section limits and the relevant adjustment factors of each
zone in the German tax scale were calculated. The section limits of the second and the
fifth zone (g and h) are given exogenously by the legislator. The others can be calculated
by equalizing the first derivatives of the second and the third zone as well as equalizing
the first derivatives of the third and the fourth zone. The individual adjustment factors are
calculated by equalizing the adjacent tax functions of each zone. The results for all
absolute terms in each section of the tax scale are displayed in Table 4.
7 A quite similar notification can be found at (Siegel 1999, p. 559).
The refusal of the subsistence level for nonresident taxpayers
123
In Table 4 it is shown that the subsistence level is taken into account in the form
of a constant adjustment of g � (a2 � g ? b2) which is subtracted from the remaining
income tax. This means, that Germany grants the subsistence level as a tax credit.
4.3 The additional tax burden of nonresidents
4.3.1 The consequence of sec. 50 (1) ITA
Following the interpretation of the ECJ judgment in case Gerritse (ECJ 2003), the
taxable income of a nonresident is increased by the amount of the subsistence level
[sec. 50 (1) sentence 2, first clause ITA]. After this modification, the tax scale
pursuant to sec. 32a (1) ITA has to be used. In contrast to the opinion in literature
(Loschelder 2013, p. 2262), the taxable income still has a virtual component equal
to the amount of the subsistence level. Loschelder justifies his opinion by the fact
that this component would be eliminated by the adjustment factor of each zone in
the tax scale. Additionally, he shows two examples (Loschelder 2013, p. 2262).
However, another consequence caused by adding the subsistence level—and this
is missing in his argumentation—is that each particular zone applies for a lower
income, which means that the income is taxed at a higher rate. As generally shown
in chapter 3.3, the shift of the different limits of the tax scale is a horizontal shift
towards the point of origin. The amount of the horizontal switch is equal to the
amount of the subsistence level.
Table 4 Limits of the tax scale and adjustment factors of the German income tax scale in accordance
with sec 32a ITA
Zone (n) Zone limit (TLn-1) Adjustment factor (cn)
1 – –
2 g c2 = -g � (a2 � g ? b2)
3 12� b3�b2
a3�a2 c3 ¼ � 14� b2�b3ð Þ2
a2�a3þ c2
4 12� t4�b3
a3 c4 ¼ � 14� b3�t4ð Þ2
a3þ c3
5 h c5 = -h � (t5 - t4) ? c4
Table 5 Limits of the tax scale and adjustment factors of a nonresident taxpayer taxed pursuant to sec.
50 (1) ITA
Zone (n) Zone limit (TLn–1) Adjustment factor (cn)
1 – –
2 0 c2 = 0
3 12� b3�b2
a3�a2� g c3 ¼ 1
4� b2�b3þ2�g� a2�a3ð Þ½ �� b3�b2þ2�g� a2�a3ð Þ½ �
a2�a3
4 12� t4�b3
a3� g c4 ¼ 1
4� b3�t4þ2�g�a3½ �� t4�b3þ2�g�a3½ �
a3þ c3
5 h - g c5 = (h - g) � (t4 - t5) ? c4
J. Glowienka
123
The results for the German tax scale are described in Table 5. Not surprisingly,
the zone limits and the adjustment factors differ from those in Table 4.
4.3.2 The consequence of setting the subsistence level equal to zero
As already mentioned in the general analysis, g must set equal to zero if the
subsistence level is granted as tax credit. Thus, in this case TL1 shifts to the point of
origin while the other sections remain unchanged. That means that the marginal tax
rates for income greater than the subsistence level are identical for resident and
nonresident taxpayers. This is in contrast to the current procedure ruled in sec.
50 (1) ITA.
In contrast to the limits of the tax scale, the absolute term changes. This occurs
first in the second zone where the adjustment factor c2 now equals zero. This leads
to further changes in all subsequent zones as the adjustment factors of each section
are decreased by the constant amount of g � (a2 � g ? b2). Table 6 summarizes the
different results for each zone.
Finally, if the subsistence level is denied, the tax scale pursuant to sec. 32a (1)
ITA is used for nonresidents in such a way that second zone is applied to an income
higher than zero up to the limit TL2. The other limits remain unchanged. With
Table 6 Limits of the tax scale and adjustment terms of the German income tax scale in the case of the
denial of the subsistence level
Zone (n) Zone limit (TLn–1) Adjustment factor (cn)
1 – –
2 g c2 = 0
3 12� b3�b2
a3�a2 c3 ¼ � 14� b2�b3ð Þ2
a2�a3
4 12� t4�b3
a3 c4 ¼ � 14� b3�t4ð Þ2
a3þ b2�b3ð Þ2
a2�a3
h i
5 h c5 ¼ �h � t5 � t4ð Þ � 14� b3�t4ð Þ2
a3þ b2�b3ð Þ2
a2�a3
h i
Table 7 Exogenous and endogenous parameters for the tax year 2014
Exogenous parameter Value Endogenous parameter Value in EUR
a2 974.58 9 10-8 TL2 13,469
b2 -2,283,282.64 9 10-8 TL3 52,881
a3 228.74 9 10-8 c2 -489
b3 17,808,201.88 9 10-8 c3 -1,842
t4 0.42 c4 -8,239
t5 0.45 c5 -15,761
g EUR 8,354
h EUR 250,730
Source: Sec. 32a ITA, press release of the German Bundesrat (2012) and own calculations
The refusal of the subsistence level for nonresident taxpayers
123
respect to a nonresident taxpayer, the adjustment factor of each zone is decreased by
the amount of the adjustment factor of the second zone.
4.4 The comparison of both methods
In order to show the impact on nonresident taxpayers, the different tax burdens of
each method are calculated. In the first column of Table 7, the calculated exogenous
parameters are described for the tax year 2014 which influence the endogenous
parameters displayed in the third column of Table 7.
The annual additional tax burden DT(I) of nonresidents compared to the one of
residents are displayed in Fig. 4. The calculations neglect the solidarity surcharge in
Germany. If the parameter of the subsistence level is set equal to zero, the additional
tax burden of a nonresident increases up to the amount where the income is equal to
the subsistence level. If the domestic income exceeds the subsistence level, the
additional tax burden remains constant at EUR 489.
This is in contrast to the current method where the taxable income is increased by
the subsistence level. In this case, the absolute tax burden of a nonresident increases
until an annual income of EUR 52,881 is reached. The additional tax burden
increases to approximately EUR 3,509. The maximum of the additional tax burden
is reached at an income exceeding EUR 250,730 leading to an additional tax of
approximately EUR 3,759.
The treatment of residents and nonresidents in relation to their marginal and
average tax rates is shown in Fig. 5. If the subsistence level is refused, the marginal
tax rate on the German income of nonresident taxpayers increases from zero to the
‘‘starting tax rate’’ of 14 %. This applies when the income is less than the
subsistence level. If the income exceeds the subsistence level, the marginal tax rate
Fig. 4 The annual additional tax burden of a nonresident
J. Glowienka
123
of a nonresident taxpayer is exactly the same as the one of a resident taxpayer.
Nevertheless, the average tax rates of nonresidents are higher for all income.
Under the current provision, the marginal tax rates for nonresidents are—up to a
domestic income of EUR 52,881—higher compared to the marginal tax rates of
resident taxpayers. The same applies within the interval of a taxable income from
EUR 242,376 to EUR 250,730. Between EUR 52,881 and EUR 242,376 and for an
income of more than EUR 250,731, the marginal tax rates are equal for both,
residents and nonresidents. The average tax rate for nonresidents starts at 14 %.
Moreover, this average tax rate is higher than for residents and also exceeds the case
in which the subsistence level is correctly refused.
5 Conclusion
The topic of this article was the impact of the refusal of the subsistence level for
nonresidents. This topic is influenced on the one side by the decisions of the ECJ
and on the other side by the national tax law. After a short literature overview, the
analysis started with the general legal framework set by the ECJ.
The theoretical analysis pointed out that granting the subsistence level as a
deduction from the taxable income leads to a horizontal shift of the applicable tax
scale. This method can be implemented into the tariff function, which leads to an
equivalent result. For those purposes it is crucial to determine the limits of each
zone depending on the subsistence level.
Fig. 5 Marginal and average tax rates of residents and nonresidents
The refusal of the subsistence level for nonresident taxpayers
123
Secondly, granting the subsistence level as a tax credit leads to a vertical shift of
the applicable tax scale. This method can also be implemented into the tax scale. For
that purpose, the relevant article of the national tax law has to define the limits of
each zone independently from the granted subsistence level.
Following ECJ (2003), it should be in line with the European legal framework
that the subsistence level is refused for nonresidents by adding the applicable
amount to the generated income in the state of source. However if the subsistence
level is granted as a tax credit, this refusal leads to an additional tax burden for
nonresidents on top of the additional tax caused by the denial of the subsistence
level. Thus, in these situations a conflict between the more recent decision in case
Gerritse (ECJ 2003) and the earlier decision in case Asscher (ECJ 1996) can be
identified. This finding should be more intensively discussed by legal research on
taxation.
A numerical example was used to in general describe the fiscal impact of a state
in general. It can be concluded that it is firstly financially less attractive for a state to
grant the subsistence level as a deduction from the taxable income than as a tax
credit. Secondly, refusing the subsistence level the same way it is granted is
financially less attractive than using the second principle the ECJ set in case Gerritse
in 2003 (ECJ 2003).
The findings were applied to the case of Germany to give a less general example.
It was established that the subsistence level even in Germany is granted as a tax
credit. This was identified by analyzing the definitions of the tariff limits in sec. 32a
ITA which do not depend on the subsistence level. Following the taxation of
nonresidents in accordance with the decision of the ECJ, nonresidents who are
denied the subsistence level are faced with an additional tax burden. At its
maximum, this additional tax burden amounts to EUR 3,759. This might be in
breach with the rulings of the ECJ (1995) and should be relevant for further legal
research of this topic.
Acknowledgments This paper has benefit from contributions of various people, especially Stephan
Kudert, Adrian Cloer and the participants of the 6th EUV/EBS Doctoral Seminar in Warsaw. Language
support was delivered by Daniela Blaudow and Michaela Schreier. Finally, the department editor Jochen
Hundsdoerfer and two anonymous reviewers provided very helpful support on this and a former version
of this manuscript.
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